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Ardent Listener
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 Posted - 03/22/2009 : 19:46:46
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Gold scrap sales hold prices down, but not forever
Wednesday, 18 Mar, 2009 | 05:15 PM PST | Jewelry is being melted down to feed the appetite of goldbugs - File photo. LONDON: A mix of hard economic times, near-record bullion prices and currency devaluations in key jewellery markets has released a flood of scrap gold onto the market, putting a brake on the metal's advance, Reuters reported.
Buying up once-cherished trinkets has become a buoyant new business as jobs are lost and incomes threatened in the global economic downturn, with new dealers opening in Europe and North America to tempt the cash-strapped to part with their gold.
Retail outlets are advertising for scrap in shopping malls, European housewives are selling earrings weighing a few grammes to raise instant cash, and ‘gold parties’ in the United States, where people sell old jewellery, are becoming a phenomenon.
Analysts, however, are confident demand for gold as a safe haven from risk-averse large investors such as hedge funds will trump this new source of supply in the medium term.
‘Scrap is not infinite,’ said Standard Bank analyst Walter de Wet. ‘It has got to stop at some stage, even if prices go higher. Investment demand will top scrap at some stage.’ While exact figures on the amount of scrap entering the market are hard to fix, refiners say supply is soaring.
Scrap gold collected by dealers is melted down by refiners and recast into bars and coins, which can then be sold on as investment products.
Turkish Influx
An influx of scrap gold onto the domestic market was behind a drop-off in Turkey's gold imports to zero in the first two months of this year, against nearly 32 tonnes a year before.
Rising scrap sales meant refineries minted so much bullion in Turkey that it was exported for sale on the international market - a new trend for the country.
The world's largest gold consumer, India, and China are also said to be exporting gold, while scrap has been flowing steadily into Dubai, the Middle East's largest gold trading market, according to the Al Ghurair Giga Gold Refinery.
Major Swiss refinery Argor-Heraeus said scrap supply has ‘about doubled’ in the last six months.
UBS metals strategist John Reade said scrap inflows are running at unprecedented levels. ‘All the refineries I speak to are full - some are actually turning away scrap,’ he said.
In major gold markets such as India, the Middle East and Turkey, scrap sales almost always rise when prices go up. In these regions gold is often seen as an easy source of liquidity.
But the trend has been exaggerated by weakness in key consumer currencies. Gold has hit record prices this year in both the Turkish lira and the Indian rupee
The effects of rising scrap supply on price have also been exaggerated by the effects of the global economic slowdown, which is weighing heavily on jewellery demand.
The World Gold Council said fourth-quarter jewellery demand fell 6 per cent, and traders say it remains soft this year.
Gold hunters
Gold collectors are becoming more proactive in hunting out scrap, said Philip Newman, head of reserch at metals group GFMS.
‘One company advertised in the Superbowl to buy scrap – and that is an expensive advert,’ he said. ‘That gives you a sense of how profitable some parts of this business has become.’ This build-up in the infrastructure available to sell scrap
has made it easier than ever for ordinary people to make money from old or outdated jewellery they no longer wear.
But while scrap supply has been strong, it is unlikely outrun the rise in investment interest in gold as declining returns from other investments in uncertain economic times boost the metal's appeal.
Gold-backed exchange-traded funds have seen large inflows since the beginning of 2009. ETFs, which issue securities backed by the metal, have mopped up large quantities of physical gold.
The world's largest bullion-backed ETF, the SPDR Gold Trust, has seen a 277-tonne rise in its holdings since Jan. 1.
ETF buying was a major factor pushing spot gold to an 11-month high above $1,000 an ounce in February - within touching distance of its peak price of $1,030.80 hit last March.
Buying of products such as coins and bars also rose sharply in the last quarter of 2008 as investors turned to physical gold as an alternative investment to more volatile assets. Such products are not returning to the market, dealers said.
‘Those people buying (coins and bars) in the last couple of months were really safe-haven buyers, and they are not worried about a 10- or 20- per cent price drop,’ said Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus. ‘They see it as long-term insurance.’
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